MNI INTERVIEW: Fed To Pause, Take Stock Early 2025 -Lockhart
MNI (WASHINGTON) - The resilience of the U.S. economy may prompt the Federal Reserve to pause rate cuts early next year amid considerable uncertainty on the fiscal outlook, former Atlanta Fed President Dennis Lockhart told MNI.
The FOMC will likely deliver on the 100 basis points of cuts it penciled in for 2024 by cutting a quarter point at each of the two remaining meetings this year but will likely also need to reconsider the second 100bp of easing officials wrote down for 2025 – perhaps pausing as soon as January, Lockhart said.
Data suggest no reason to veer off track from September's projections for now. But with growth running at an above-potential 2.8% pace in the third quarter and consumer spending accelerating, the Fed can't ignore upside risks for inflation, he said.
"I suspect because of the greater than expected strength of the economy that there is still a constituency on the FOMC that's a little bit cautious about claiming victory over inflation and moving to remove restrictiveness at the pace of 100bp by year-end and another 100 next year," Lockhart said in an interview. "You have to be worried about overheating and some reversal in the inflation numbers."
"I would stick to the September-November-December game plan. The policy path characterized in the SEP remains a sound approach to the gradual removal of inflation-fighting restrictiveness. But it might be a very comfortable matter to pause and take stock in January. (See MNI POLICY: Bumpy US Data Won't Take Fed Off Steady Course)
FISCAL WORRIES
Investors have pulled in rate cut expectations a surprising amount since September's 50bp cut, citing not only strong economic indicators but growing concerns about the fiscal outlook. Both presidential candidates are promising tax cuts and new spending that will boost the deficit, with Donald Trump's immigration and tariffs plans most worrisome to economists.
Lockhart doubts the FOMC will act on political rhetoric alone. The Fed will wait for the inflationary effects of new policies to materialize in the data, knowing the second- and third-order effects of actions such as across-the-board tariffs aren't easily predicted, he said.
"I don’t think they’ll get way over their skis on this one. The committee needs more tangible evidence of the policy being implemented and the likely results, and it’s probably wise to be cautious about drawing conclusions too far in advance about the total effect of various policy ideas," he said.
"We can get too easily into the mindset that the whole story is the fiscal situation or tariffs. The committee looks at fiscal matters as just one element of a picture that includes the employment situation, business investment, the AI revolution, net exports – and it is not going to be singled out for response." (See MNI INTERVIEW: US Job Market Slowdown Reflects Slowing Growth)